Ladies and gentlemen, good day, and welcome to the Dixon Technologies Q2 FY 2025 earnings conference call, hosted by DAM Capital Advisors Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star, then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Bhoomika Nair from DAM Capital Advisors Limited. Thank you, and over to you, ma'am.
Yeah, thank you. Good evening, everyone, and a warm welcome to the Q2 FY 2024-25 earnings call of Dixon Technologies. We have the management today being represented by Mr. Atul Lal, Managing Director and Vice Chairman, and Mr. Saurabh Gupta, Chief Financial Officer. I'll now hand over the floor to Mr. Lal for his initial remarks, post which we'll open up the floor for Q&A. Thank you, and over to you, sir.
Thank you so much, Bhoomika. Good evening, ladies and gentlemen. This is Atul Lal, and we have on the call today our CFO, Saurabh Gupta.
Good evening, everybody.
Thank you very much for joining these earnings call for the quarter ended September two thousand twenty-four. First, coming to our overall performance for the second quarter. Consolidated revenues for the quarter ended September thirtieth, two thousand twenty-four, was INR 11,528 crores, as against INR 4,944 crores in the same period last year, growth of 133%. Consolidated EBITDA for the quarter was INR 420 crores, against INR 200 crores in the same period last year, growth of 110%. Consolidated PAT for the quarter is INR 412 crores, against INR 113 crores in the same period last year, which is growth of 265%.
This includes fair value gain of INR 210 crores in the value of Dixon's stake of 6.5% in Aditya Infotech Limited. Excluding this gain, the adjusted PAT for the quarter was INR 236 crores, which is a growth of 109% year-on-year. With a strong capital allocation discipline and effective working capital management, we were able to expand our ROC and adjusted ROE to 38.9% and 31% respectively, as on thirtieth September 2024. We feel confident the same would keep improving in the upcoming quarters and years on account of improved earnings, working capital efficiency, higher asset turns in mobile and IT hardware business. Gross debt-to-equity ratio stood at 0.162, and cash conversion cycle of -3 days.
We believe strongly that we have a platform to sustain a strong revenue growth moving forward through the strengthening in the overall demand environment and addition of new customers across all businesses. Our foremost objective continues to be part of India's long-term growth story and to ride the country's robust consumption narrative and Make in India initiative to achieve industry-leading growth. Now, I'll share with you the performance and the strategy in each of the segments going forward. Mobile phones and EMS divisions. Revenue for the quarter were INR 9,444 crores, with a growth of 235% year-on-year. Operating profit was INR 308 crores, a growth of 231% year-on-year.
In addition to the four operational facilities and one facility with 1 million sq ft under construction, we have taken additional 1.5 lakh sq ft facility in Noida on lease to cater to the increased demand of our principal customer, which is expected to start in the current quarter with a monthly capacity of another 400K smartphones per month. We have successfully consummated the acquisition of iSmartU on thirteenth August 2024, and we have a healthy order book for Transsion group of brands. That's Tecno, Infinix, and Itel, and another brand, Nothing. For Motorola, we've been consistently closing a volume of 1 million per month, and order book looks healthy in coming months, including some decent export orders for North America market. The volumes for Xiaomi and Oppo in Q2 witnessed significant growth, quarter on quarter.
Production for a large global brand, through Compal, is expected to commence by end November 2024. We are also in active discussions with another large global brand. We have finalized location for manufacturing of displays in partnership with HKC. We expect to start manufacturing by Q1, end of Q2, beginning of next financial year. We are also looking to further deepen the level of manufacturing and looking to get into precision components, mechanical and camera modules, and the same is under deep study, and we are working on the possible partnerships. Consumer electronics, that's LED TVs and refrigerators. Revenues for the quarter were INR 1,413 crores, with an operating profit and margin of INR 52 crores and margin of 3.7%. Out of this, the revenues for refrigerator business were INR 188 crores.
LED TVs, we have onboarded a few multinational brands on our TV ODM solution, like Hisense and Hisense, for Google TV and Linux platform. We are working closely with Amazon Fire TV solutions and LG for WebOS, which is expected to be rolled out in Q4 of FY 2025. In addition to interactive flat panel display, we have now started manufacturing digital signages solution from 65 inches to 100 inches with decent order book. State-of-the-art R&D center for display devices has been set up in Noida for superior product development in TVs, IFPDs and signages. In order to deepen our component base in TV, we're exploring a tie-up with global player for open cell bonding facility. We are actively exploring for partnerships for manufacturing, for industrial, institutional and automotive displays.
Refrigerators, against a capacity of 1.2 million direct cooled refrigerators across 190- to 350-liters, we are now achieving 90% capacity utilization. We expect a similar run rate in the coming months. In fact, now we are looking to expand our capacity to almost 1.6 million. We have healthy order book with major Indian brands. We have started mass production for Voltas, Kelvinator, Acer, Lloyd and BPL. We have backwardly integrated many production processes and further exploring investment in deep freezers, mini coolers, wine chillers, et cetera, along with two-door frost free and side-by-side refrigerators. Home appliances, revenue for the quarter was INR 444 crores, that's a growth of 22% year-on-year. Operating profit was INR 49 crores, a growth of 17% year-on-year.
In Q2, we clocked a monthly run rate of 30,000 units of fully automatic category, which is 50% growth year-on-year. In line with our backward integration strategy, we've added multiple mold and injection molding machines to reduce our dependency on imports. Further, we have started extending molding support to our business segments and have done mold for lighting and telecom business. Our footprints in Tirupati and Dehradun are now BIS and NABL certified, which strengthens our competence and reliability for deepening relationship with customers. We have healthy order book, and we are targeting double-digit growth in this business in this fiscal. Lighting revenue for the quarter was INR 233 crores, with an operating profit of INR 17 crores. Both revenues and operating profit have grown quarter on quarter. We are spontaneously introducing new product range in the category of downlighters and outdoor professional lighting.
We have boarded marquee global customer, IKEA, for domestic market. Telecom and networking products, revenues in this segment for the quarter were INR 660 crores. We are looking for more than 3X growth in revenues in this fiscal as against last financial year. We have added one more facility in Noida to meet the increasing requirements for our anchor customers. We have also ramped up our production for 5G fixed wireless access, outdoor and indoor units for domestic market, and planning to double the capacity for the same to meet the customer requirement along access points, GPON ONTs and internet set-top boxes. We are in the process of introducing IPTV boxes for domestic market, and production should commence in this fiscal.
Laptops, tablets, that is the IT hardware products, we have finalized the business with HP and ASUS, and the definitive agreements are in the final discussion, and now along with Acer and Lenovo, we have four global brands on board out of the top five brands in India. Manufacturing of Acer has already started, and production for Lenovo is expected to start in this quarter from our Noida facility. Our three lakh sq ft Chennai facility will be ready by end of December 2024, and production for HP and ASUS is targeted to commence by Q4 2025. Wearables and hearables, revenues for this segment were INR 263 crore for this quarter, with healthy operating margin and a superior ROCE. We have decent order book in this business.
Rexxam Dixon Electronics JV with Rexxam achieved revenues 90 crores in this quarter, despite Q2 being a lean season for this business. We have also now started supplying to the Sri City plant of Daikin, which is our principal customers. I would like to stop here, and me and Saurabh are there to address your questions. Thank you.
Thank you very much, sir. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press *2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Sanidhya from Unicorn Assets. Please go ahead.
Hi. Firstly, a very happy festive season to everyone at Dixon. Congratulations on good set of numbers. My first question would be related to the IT hardware PLI scheme. So, last conference, you might have indicated that we are doing a INR 150 crore CapEx for 1.5 million units, and we are slowly eventually adding to 3.5 million units. So, is there any additional CapEx that would be required for the ramp up? And, in terms of total PLI for the IT hardware was near about INR 70,000 crores, if I'm not wrong. And out of this, how much did Dixon committed or got, like, from in terms of total percentage, if you can share our estimated number, that would be great. Yeah, that's the first.
So in phase one, the committed CapEx is around 150 crores in our Chennai plant, which is going to be creating a capacity for around 1.2 million units. Let's see how the business pans out, and then we are committed to putting more CapEx to expand the capacity to almost 3-3.5 million. In our business plans submitted to the government, we have committed to the government a revenue of 48,000 crores over the period, over the tenure of PLI. That's, yeah. So I think when this business ramps up, in the initial phase, in the first phase, it's going to stabilize at around 4.5-5,000 crores by year three annually, yeah.
Sure, so, so you're saying INR 4,500 crore could be revenue from 1.5, 1.2 million units that you're committing, right?
That's right.
Okay. And secondly, on the total addressable market, so if I see for FY 2023, there were total 11 million units that were imported for the notebooks or laptop side for the top five players, out of which we have backed up four players. One is missing. I think Dell is missing from our portfolio right now. So any comments on Dell and any comments on till when are we planning to reach, like, 50%, as we say that we want to reach 50% of the total market share? So out of 11 million, how much? Like 5, 5.5, by when are we planning to reach?
So please appreciate, as we shared in our opening remarks, that out of five top brands in India, we have now onboarded four brands. And initially, what we are targeting is... You see, these $11 billion imports that you're talking about is the sale value. The production value is almost 55%-60% of that.
Sir, 11 million, I was referring to.
What we feel is that, initially, I mean, finally, when we reach around a million, 1.2 million, we are going to generate a revenue of around INR 4,500 crores, but subsequently, it's going to be significant gains, because that's the kind of forecast that we are getting from customers. But I think we'll have to move in the steps. There have to be building blocks. We have to generate adequate confidence on our capability to deliver. This is an entirely new product line, which requires an additional technical bandwidth, and then it will happen. I'm confident that what the team has been able to deliver, let's say, in mobile phone as a category, we will be a very, very large player, possibly the largest in the sector as far as contract manufacturing is concerned.
What the number is going to be, it's slightly premature to give that idea, but what I'm sharing with the stakeholders is that we are going to be at around 4,500-5,000 crore level in next two to three years.
Sure, sir. Thank you for that. And just if you can share the breakup for the 1,111 crore revenue for iSmartu, number of units?
This, you see, this come on board from thirteenth of August, that's when it was consummated, to thirtieth of September. In this, the volume is going to be approximately around 800 K of the smartphones.
Yeah, 800,000 smartphones already. Oh, okay. So at what proportion this would be right to estimate, like, 10%-15% of overall yearly revenues?
We feel that iSmartu revenue should be in the range of around INR 7,000-7,500 crores.
For the next year, right?
For this year, for current year.
For this year and 9,000-10,000 for next year?
So next year, hopefully, we're gonna reach that particular number. What we are referring to is the current year.
Thank you. Thank you so much. All the best.
Thank you.
Thank you so much. The next question is from the line of Natasha Jain from Nirmal Bang. Please go ahead.
Yeah, thank you for the opportunity, and congratulations, sir, on good set of numbers. So, my first question is on mobiles. Can you please call out the brand name of the mobile along with the production that we're doing monthly for them, and where can we scale that in future?
Natasha, we don't want to share any customer-wise numbers with the market or with the... I can give you an overall number, how many smartphones we have sold in this quarter, but customer-wise, we don't feel comfortable sharing it.
Sure. So, if you can even give the overall number?
Smartphones, we did almost 81 lakhs or 8.1 million in this quarter, and another 13 odd lakhs of Samsung smartphone.
There is a significant growth.
Yeah.
If you see smartphone last year, Q2 2023-2024 was 1.43 million, which has gone up to 8.13 million, which is a growth of 468%.
In the first six months, we have already done a smartphone number of almost 10.2 million, excluding Samsung.
Understood, sir. Understood. And, sir, in terms of gross margin, can you call out why we've seen a decline of 200 basis points?
See, gross margins and EBITDA margins, again, it's a function of the mix. A large part of the revenue contribution is coming from mobiles, which is relatively a lower gross margin and lower EBITDA margin business. And also, the selling prices of some of the phones from the brands have also gone up, because of migration from 4G to 5G. So, the gross margins, yeah, is basically a function majorly on account of the change in sales mix.
Understood. And sir, lastly, where are we in terms of the export customer for lighting?
So, lighting, the export orders from Germany have already matured. They are in the execution stage. With one large customer in U.S., we are almost at the final stage.
Thank you, sir. If I have more questions, I'll get back in the queue.
Sure. Thanks, Natasha.
Thank you so much. The next question is from the line of Deepak Krishnan from Kotak Institutional Equities. Please go ahead.
Hi, sir. Am I audible?
... Yeah, yes, you're audible.
Yeah. Yeah, so, nothing, sir, just couple of questions. Maybe just wanted to cross-check how much of the feature phone number this quarter are we sort of looking at, you know, going higher than the guidance of 25-30 million smartphones for the year? And maybe then I'll sort of follow up with a couple of questions after that.
Specifically talking about feature phones or smartphone, feature phone?
I remember last quarter you had given a number. So you've already given the smartphone number. Feature phone was, I think, 6.6 million last quarter. So I just wanted to check the corresponding number for this particular quarter as well.
We did around nine point one million feature phones as compared to eight point three million last year, same period, and overall, in six months, yes, we have done a number of almost fifteen point seven million feature phones.
Sure. And any sort of PLI incentive booked this particular quarter, and any reason why the other income is sort of negative?
So we have booked a PLI income of almost 70-odd crores in the first six months. Sorry, in quarter two, and the other income is negative, mainly on account of the FX loss, majorly on account of our CapEx machinery payments, which were majorly in the Japanese yen. Japanese yen, as you know, in this quarter, has really appreciated. But again, now, the Indian rupee has appreciated lately in the month of October. So, it is a kind of a notional kind of a loss that we have had mainly on account of the Forex loss.
Sure, because, given the strong start of 12.2 million smartphones in one month, are we still guiding to 25-30 million, or do we think that, you know, we can even cross the upper end of the guidance?
So, we have not given any guidance, and order book, please be rest assured, is extremely strong.
Yeah, order book looks strong, and
Particularly now with acquisition of iSmartu materializing, the order book looks extremely healthy. Yeah.
Yeah. Maybe just, one final question. Just wanted to understand, TV, even if we, so the consumer electronics, even if we include refrigerators, there's a YY decline. The TV volumes are relatively weaker, or is it a function of pricing that has caused a decline in the standalone TV business?
The main reason for a lower revenue number in that category is mainly because of a dip in volumes year on year in TV, so we did almost 9.7 million LED TVs in quarter two, as compared to 10.8. So there is a degrowth of almost 10%, which is reflected in the lower revenue number as well.
Sure, sir. Those are my questions, and best of luck for future.
Thank you so much. The next question is from the line of Siddharth Bera from Nomura. Please go ahead.
Yeah. Hi, sir, thanks for the opportunity, and congrats on a good set of numbers.
Thank you, sir.
So, first question, on again, mobile side, possible to highlight some insights into the pricing for generally the customers like Xiaomi and Oppo? Because I think on the pricing side, we have continued to see surprise. So, if you can just highlight some trends across the customers.
Yeah. So basically, the broad pricing for Xiaomi, of course, it keeps changing model on model. But yeah, the broad average pricing would be somewhere in the range of INR 6,000 odd rupees, odd pricing. And Oppo would be somewhere around INR 8.5-INR 9,000 odd rupees, and most-
But the other large customers, because it's migrated to 5G-
The price points are significantly higher. So, for us, it's not... We'll not be able to share the customer-wise pricing. Okay?
Got it, sir. And in terms of the ramp up, I mean, how do you look at in terms of customers, where do you see the biggest potential? And given your understanding and discussions, where do you see which customer has the biggest potential from where we are currently?
So please appreciate that, in the smartphones, we are the largest manufacturer today, and practically all the brands in Android ecosystem are our customers. A brand like Motorola is doing exceedingly well, and even the other brands who are our partners, I see a lot of buoyancy and lot of positivity in their order book. So, the business and the order book look good. I feel that Q4 particularly is gonna be very good.
Got it, sir. So last question is, when you talked about iSmartu of INR 7,500 crores, so this is for the period of this year, starting thirteenth August, or, there is possibility for the full year?
This on annualized.
This is on an annualized basis, yeah.
Annualized basis. Okay, got it, sir. Thanks a lot. I'll come back again.
Thank you. Our next question is from the line of Ms. Bhumika Nair from DAM Capital. Please go ahead, ma'am.
Yeah. Congratulations, sir. So you mentioned that, you know, our smartphone volumes has been about eight point one three. Now, this is including iSmartu or this is excluding iSmartu, sir?
This is including iSmartu, from thirteenth of August.
For 45 days.
45, 47 days.
Okay. So yeah now, how are we seeing all our existing volume, you know, customers of this kind of scaling up? If you can give some sense on what was the September exit monthly run rate, and, you know, we can understand then, you know, possibly how it can scale up over the next couple of months.
...So, Bhoomika, including iSmartU, the present run rate is around 2.7, 2.8 million per month. This is without Samsung volumes. Now, I feel that post-Diwali, the market is slightly slow, so there's going to be a dip in this volume, but it's going to recover and possibly become slightly better from Q4.
Okay. Okay, and then by then we'll also have the Compal and other customer that we are looking to add on.
Compal is going to start by end November. Yeah.
Other customer, it's in the works.
Okay. So, the other question was in regard to , you know, our HKC JV for the backward integration. You mentioned that unit will start functioning in these first, or second quarter of next year. If I remember correctly, we were looking at some 25 million capacities. So how should we look at utilization in the first year of operations? And how are we looking to kind of scale that up, at a subsequent level?
So, Bhoomika, please, see that we are already at around three million. And with additional, customer acquisitions and hopefully larger share of customers' wallet, we should be at around three point five million or so every month. The HKC tie-up is, the phase one is two million units per month. That is for mobile phones. Because, the approvals and technical approvals, it takes some time. The project has to get involved with the brand owner at the POC stage for every new model development. So, first, we have to achieve two million, this is going to be captive. Then immediately, we plan to double the capacity to four million. That's the plan. And, this is for, going to be for captive, and any overflow is going to be supplied to the other factories of Android ecosystem.
Then in this plant, we are immediately going to set up line for displays on notebooks, which is going to be a million a year to start with. Which is again going to be for our captive, and as the quantity keeps on increasing, this capacity would keep further enhanced. Then there is a possibility of looking at automotive displays in the same unit. It is capable of doing that. And if there is a fiscal correction on the import duty structure for panels for TV, the panels for TV would also be planned there. So this is the roadmap.
Okay. And this would be over a three to four-year perspective. I mean, I'm assuming that, you know, FY 2026 is the first year for HKC. Year two, year three will be the scale-up for the mobiles and then subsequently, for IT, auto, TV, et cetera. Or do you think it could happen sooner?
No, no, it's going to be in phases. First is mobile and IT products, then an expansion of mobile capacity, and then others.
Okay. Sir, the other theme was on the, you know, industrial PCBA. Just wanted to get an update out there, you know, have we done any client additions? What is the scale up? When can we start seeing revenue from that segment to start drifting in, and any customers where we are in very advanced stages?
We are in advanced stages of discussions with a large industrial electronics PCB customer. It is almost at a final stage. It's a complex approval system. For the business to start commercial production will take some time, but we are almost there. It's in final stages.
Okay, sir. Great. I'll come back in the queue. Thank you very much.
Thank you.
Thank you so much. The next question is from the line of Aditya Bhartia from Investec. Please go ahead.
Hi, good evening, sir.
Good evening. Hi.
Just wanted to understand. Hi, sir. So, on the mobile phones, mobile phone segment, we have seen a very, very sharp ramp up this quarter. So just wanted to understand how much seasonality is involved. Like you mentioned that post-Diwali, there may be a bit of a slowdown. We have hit the run rate of 2.7 to 2.8 million phones per month. So how slow does it typically fall to, and then how sharp is the recovery in fourth quarter?
Aditya, I feel that in quarter three, that is, present running quarter, this 2.8 million should be around 2.3-2.4 million run rate. After that, 2.4-2.5. And I think by Q4, it should go up again back to 2.8-3.
Understood. Understood, sir. So secondly, on the component's ecosystem, can you just give some more indications about how we are planning it? Which all components can we get into? What kind of CapEx are we ready to put in? Can any of the components be significantly CapEx intensive, or are they going to be more or less similar to the HKC kind of an arrangement that we are having?
Aditya, what we are working upon is to capture the value addition on the non-semiconductor side. And the target is, let's say by with HKC, we're able to capture almost 8-9% of the BOM. What we are working upon is on camera modules, which is going to give us another 7-8%, and we're working on the mechanical. That is basically the enclosures, the precision components and die cuts, which should give us another 8-9%. So, this is almost going to be 27% of the BOM that we are targeting to do in-house, and this is margin-accretive business. We are looking at the potential partners. With some of the partners, we are in advanced stages of discussions. As far as the CapEx is concerned, it's going to be almost of a similar order as HKC.
In some components, slightly up, in some components, slightly lesser than what HKC project profile is.
Perfect. Perfect. That's great. And just one last thing. On the TV business, want to understand that. Is this weakness broad, seen broadly in the industry, or are we seeing something happening on the competition side?
So we see that as largely an industry issue. LED television industry is not growing at all. In fact, it is declining. So, there might be some competitive pressure, but I'm not seeing any of my business going elsewhere, largely in last one year. I see largely the industry quantities to be under pressure.
Perfect, sir. That's very helpful. Thank you so much.
Thanks, Aditya.
Thank you so much. The next question is from the line of Keyur Pandya from ICICI Prudential Life Insurance Company Limited. Please go ahead.
Thank you. Congratulations, team, for the great result. Just one question. So on the mobile side, our execution has been phenomenal, and the kind of growth that you are talking about for FY 2025 as well as 2026, probably we would be, I mean, pretty large, probably 30% of India's volume, so even larger in terms of outsourced market. So in general, how the discussion is going around, say, for volumes, beyond FY 2026, or even for FY 2026, and thereafter, once the PLI is over, so, for that period, I mean, what has been the discussion with the client? Just to understand the thoughts from the client, which is being conveyed to you.
I mean, any ramping up of components. Will there be a gap between the ramp-up of components and, say, end of PLI? Just thoughts on revenue on mobile segment beyond FY 2026. Thank you.
So let me just give you a top-down kind of a picture. You see, please appreciate, the smartphone, the feature phone being sold in India would be manufactured in India. That's a no-brainer at all. Now, the question is that amongst the Indian contract manufacturers or among the contract manufacturers present in India, is Dixon most cost efficient? And also, do we have deepened strategic relationships to ensure that even beyond PLI, we continue to maintain our pole position? So, we feel confident. Our Motorola relationship is extremely, extremely robust. We are the only contract manufacturer. And also, now, Transsion, that is Itel, Infinix, and Tecno brand, which is almost eight hundred K to one billion units per month, is our company. So, we are absolutely assured of... I mean, these are our accounts. And then comes the other accounts.
So that's where Dixon has to work, and we feel very confident that with the kind of scale we have, we generate an adequate operating leverage, and this business is going to be sticky. In fact, we're going to have a larger share of the customer's wallet. Now, the direction that we are taking of backwardly integrating and operating in the non-semiconductor component space, that's margin negative. The whole idea is to bring in more efficiency in the value chain so that we are able to have this pole position even beyond PLI. That's the whole idea. And also, we are fairly confident that in the non-semiconductor sector, government is going to roll out PLI in next three to four months, of which Dixon is going to be beneficiary. That's the whole strategy.
Noted, sir. Thanks a lot. Happy Diwali!
Happy Diwali.
Happy Diwali.
Thank you so much. The next question is from the line of Mayur Patel from 361 AMC . Please go ahead.
Congratulations, team, for excellent set of, you know, results. Just, Atul, one question on, you know, this IT hardware, you know, journey, which is starting now, and you're talking about scaling up to 4,500 crores, kind of, annualized numbers and things like that. Shall we expect, you know, margin profile to be similar to your mobile business and the overall economics in terms of cash flows, working capital, or it will be different?
No, it'll be almost similar.
Similar. Okay. And there also, you will eventually try to get into more components also, or it will be more differently than that?
Yeah, yeah, absolutely. Because you see the display plant that we are setting up, it's going to be producing the displays for notebooks, for laptops. And also, we are committed to get into the mechanicals, that's the enclosures and casings and precision components and die cuts for laptops. Further, the adapters are going to be done in India, and also the SSDs are going to be done in India. So, it may not be absolutely in-house, but they're going to be sourced in India because there's a PLI tool linked to that. So that's the roadmap. So, the strategy which we are pursuing very aggressively in mobiles, of first creating a very large scale, have multiple customers, have operating leverage because of the scale, and then backward integrate, is the same game plan.
Sure. Just one last question. So what's beyond IT hardware? Are there any other, new businesses which you are thinking to, what you think in, to seed? As of now, anything on the drawing board?
So, one large piece is going to be component, because that itself is gonna be consuming a lot of bandwidth. And please be rest assured, the strategy teams here keep hunting for similar kind of products. So, we are working on industrial electronics and automotive electronics. It's in the stages of infancy, but that's what we want to pursue.
Even PCBA was there, I think, in our thought process, but where are we in terms of starting anything in PCBA manufacturing?
PCBA, I shared with you in response to Bhoomika's question, that we are in advanced stages of discussion with a large electric industrial electronics company, and we are confident that this business is going to mature on the industrial electronics PCBA front.
Sure. All the best. Thank you very much.
Thank you.
Thank you very much. The next question is from the line of Pranay Roop Chatterjee from Burman Capital. Please go ahead.
Thank you. Good evening to all. Sir, am I audible?
Yeah, you are audible. Yeah.
Great. Great. So, my first question is on IT hardware again, and this is more qualitative in nature. Firstly, how do you see the overall environment, number one, in terms of demand growth in the IT hardware currently? And secondly, from a tendency to outsource, right? So, because if I recall, when the PLI participant list came out, like, those who were awarded the PLI, I think there were more than 10, 15 players, including a couple of brands, the top brands. So. But I think Dixon has done a brilliant job in converting four of the top five, and probably the only player, you know, to announce any sort of partnership and which can give meaningful numbers, right?
So how is the outsourcing environment, and do you see some of the other operators becoming active? Do you see incrementally winning business being harder, easier? Just sort of your thought process there.
So, we're just beginning on this, the journey of IT hardware manufacturing in India. I think it's going to happen. It's going to happen due to two factors. One, the capability and the competitive manufacturing cost of the Indian players, that's what the Indian players have to acquire, and prove to the brands that they can deliver on cost and quality, on new product introduction. That is one. The second is also the government policy framework. It has to keep on supporting the IT hardware manufacturing. That's extremely important, and we can see the signs from the government that they're committed to support it. So initially, I feel that it's going to be slightly slow, but once it reaches a certain level of maturity, then it's going to be a very huge, steep curve up.
And once that happens, I'm sure, just like it happens in any industry, then many other players are going to come in, and that's the trajectory it's going to have. And this also because it is linked to PLI 2.0 contours to guidelines. The deepening of manufacturing is going to be much faster. That's what I feel, as compared to any other electronic product like mobile. That's the way it's going to be.
Got it, sir. Linked to this, there was, I think, more than a year back, the government had sort of to give a push, you know, to, or a fillip to this outsourcing. They had sort of started a restriction, import restriction on laptops, and then later they, you know, after probably the industry pushed back, they moved to an import licensing system, and then practically everyone got the license. And recently it was extended as well, right, for a few months. So, do you see significant traction happening and further order wins, you know, before this import system goes away? Because at least my understanding is, unless there is a regulatory nudge, even the brands will not even, you know, consider outsourcing in a big way.
So, you're absolutely right, but we can see the signs from the government that there is going to be a deep nudge. That's what we feel. It's just a matter of some time.
Got it, sir. So, my last question is a quick one. If you could just,
Mr. Pranay, Mr. Pranay, may I request you to, that you return to the question queue for follow-up questions, as there are other several participants waiting for their turn?
Sure.
Yes. Thank you so much. The next question is from the line of Shrinidhi Karlekar from HSBC. Please go ahead.
Yeah, hi. Thank you for the opportunity, and congratulations on the set of numbers. So, we have seen a very impressive ramp up in this telecom business. So, would it be possible to share how large this business can become few years out?
Indeed, there has been a significant ramp-up in this business. Last year, we did around INR 700 odd crores. This year, we are targeting almost INR 2400 crores, if not more. And the order book looks extremely healthy, and the order book next year can be up almost INR 6-7 thousand crores. That's the way it looks.
... And so, second is on iSmartU.
Sorry?
Hello.
Yeah, iSmartu. You have given a revenue contribution of about 1,100 crore in this quarter. Will it be possible to share some light on how are the profitability in this business compared to your overall EMS business?
The profitability is going to be slightly better than our existing EMS business.
It's slightly better than our existing mobile business.
And also, because it's slightly smaller balancing and the ROC profile, as of in comparison with our mobile, ROC is slightly better.
Yes, sir, and last, if I may, the 70 crore INR of PLI incentive book, is it largely coming from IT and telecom related business, or some of it is also coming from iSmartU through consolidation?
No, iSmartU through consolidation, there is no PLI we have taken as of now. But, there is a contribution in PLI, mainly from our other businesses.
Yes.
There is, of course, mobile, telecom, lighting, and air conditioning components.
But a large part is coming from mobiles only.
But not iSmartU.
Yes. Thank you for answering my questions, and I'll be very good.
Thank you. Thank you so much. The next question is from the line of Omkar Ghugardare from Shree Investments. Please go ahead.
Hello, sir. Congrats on the good second result. My question was regarding the cost of material consumed. The percentage, as percentage of revenue has gone up by approximately 2%. Can you share the rationale behind that, from 90% to 92%, around?
Please appreciate, there is a change of sales mix, and a very significant part of growth has come from mobile, wherein the contributions are lower. That's the reason this change has happened, of reduction in the gross margins.
Okay. The next thing is on the... You just mentioned a couple of minutes back that you are looking at other high margin business, which would be increasing your overall margin. So, I mean, so currently you are at three point six. By when can we see the pick-up in margin, how much time will it take for that business to start contributing meaningfully to the overall business?
At present, the large part of growth is coming from the EMS business. It's going to be low margin business. And that's the way it's going to be for some time, because the contribution of the high margin businesses like refrigerators or washing machines, they're great businesses, but the contribution to the revenue is relatively lower. So, the margin profile is going to be similar, but margin is going to improve once we are completely operational in the component side. Then there is going to be a significant upside on the margin profile, which I think is going to take around eighteen months.
So, for the component ecosystem thing to fructify, how much time it will take? Approximately one and a half to two years. And how much approx CapEx, how much you are planning to spend?
So we are planning to spend almost INR 375 crores in our HKC plant, and for other projects, the numbers are still to be worked out.
And what is... Yeah, please.
No, the other numbers for other backward integration are still getting evaluated, but yeah, for both mobile and IT hardware display, it will be somewhere around 370-odd crores.
What kind of asset turn you are expecting in this component business?
So, asset turns would be, yeah, somewhere in the kind of line.
Around 7-8 .
9, yeah, around 8-9 times .
Yeah.
But the margin profile will be-
Significantly higher.
Will be significantly higher. Hello?
Significantly higher, yeah.
Okay. Thank you, sir.
Thank you very much. Our next question is from the line of Mr. Achal Lohade from Nuvama Institutional Equities. Please go ahead.
Yeah, good evening, sir. Thank you for the opportunity. Congratulations for great earnings. So, two questions, first, on the CapEx, you know, total CapEx, if you could talk, call out for FY 25 and possibly for FY 26, a ballpark number is good.
Yeah, so first six months, we've done a CapEx of INR 360 odd crores, and we should be broadly around INR 550-INR 580 odd crores by end of this financial year. Our numbers for next year, one has to work out the-
Many opportunities.
A lot of opportunities are there to...
So, wait.
So one will be able to better give you the guidance once we are closer to next financial year, starting next financial year.
Okay. And if you could help us with the PLI income for FY, you know, 2Q, FY 24, like to like, and also for 1H, 24 and 25 ?
So, both the quarters you mean?
Yeah, yeah, 2Q 2024, if you could help us.
70, 70-odd crores, our share of it in Q24.
24, sir. Last year.
Numbers and share it with you separately.
Yeah, but it would be a lower number of around INR 14-15 odd crore, but I have to double-check. I don't have the numbers right now with me.
Sure. And first half, if you could, first half FY 2025, PLI income?
Around INR 50 odd crores.
70 plus 50, you mean?
Yeah, 70 plus 50, right.
Okay. Okay, got it. Great. Thank you. Thank you. I'll fall back in the queue.
... Thank you very much. Our next question is from the line of Saumil Mehta from Kotak Mutual Funds. Please go ahead.
Yeah, thanks for the opportunity. Most questions have been answered, just two quick ones. Now, going forward, obviously, we'll be getting into businesses where the asset turns are lower, but obviously the margins are going to be far higher. Now, internally, do we have a threshold in mind that we'll be only chasing business where the ROC is obviously will be about 25% or 30% or something internally of we are, just a broader thought process on that?
We are, I think, working towards an extremely good blend of businesses. These businesses that we are getting into, they might be having slightly lower asset turn, but on a blended business basis, it's going to generate a 30%, in fact, higher ROC on a continual basis. And it's going to be margin accretive. So, and it's also going to be beyond numbers. It's going to create a moat for us in enhancing our stickiness with the customer. So that's the key thing. And also, we are expecting a PLI for these components to be rolled out by the government. And in our internal budgets till now, we have not taken those PLI numbers in our budgeting, so there's going to be even further enhancing and expanding our margins.
Please be rest assured that the businesses of a non-semiconductor electronic component that we pursue is not going to have a very significant impact on ROCE.
In fact, we feel that the ROC that you are seeing will be sustained and it can be better because there'll always be a fine balance between your IT hardware business, which has higher asset turns, and some of these backward integration projects which may have lower asset turns, but then again, those will have double-digit kind of margins. So, a lot of the ROC profile would not change much at a company level.
Sure. That's very encouraging. And second and last question, now, obviously, mobile is now a dominant part of business. Incrementally, we'll also be having, you know, the IT hardware and hopefully even the component business. But most of these businesses, now, again, you know, this might be a repetitive question indirectly, but most of these businesses are, you know, PLI linked. At some point in time, maybe three years out or five years out, do we believe that the businesses we get into or incrementally will have businesses which could be more self-sustaining, despite having the PLI and any importance over there?
See, please appreciate, PLI is only an added advantage. The Indian electronics industry is going to completely service the Indian requirement of the markets, so there is no question about it. PLI is only an added lever, which was required by the industry in its stages of infancy. And is it going to have an impact on Indian electronics manufacturing once the PLI tenure is over? I don't think so at all.
Got it. Got it. Okay, thank you so much, and all the best for the quarter.
Thank you so much. The next question is from the line of Madhav from Fidelity. Please go ahead.
Hi, good evening. Thank you so much for your time. Just wanted to understand as a concept that, for I think for more the backward integration projects, you said that ROCs are pretty healthy, even without the PLI. I'm just wondering, why do these projects need a PLI from the government at all, in, in case, you know, we can generate, pretty healthy ROC, despite the incentives? I'll just with you, that's my first question.
No, so you see the PLI, the government, first of all, one has to wait for the guidelines, but the first kind of draft that we have seen, which has been shared with it by the government, is the government's intent is that in these particular components, India should become a part of the global value chain. So these components are required not only to service the requirement of the devices being produced in India for domestic market, but also for global market. And when we are looking at global markets, there is some support required from the government for some time. That's what PLI is all about. So PLI on component is not for enhancing the competitiveness for servicing domestic market. It is for servicing the global market, and it's across various components, non-semiconductor components.
So I think it's required because the Indian industry still needs some support in this category.
Okay, so you're saying that the ROC which you are mentioning is more for meeting the domestic requirement right now, for the export it will be different. Okay.
That's right.
Understood. And secondly, I just joined the call a little late. Sorry for that. Did you give a guidance for the mobile phone volumes for FY twenty-five at all?
No, no, no, we don't give guidance.
Okay. All right. Thank you much. Thank you.
Thank you so much. The next question is from the line of Karan Sanwal from Niveshaay. Please go ahead.
Yeah. Hope you are audible.
Yes, yes, please go ahead.
Yeah, thank you for the opportunity. I have a few questions regarding our lighting business, like, how... If you could explain, like, how is the competitive intensity and, you know, how do we expect the industry and our lighting segment to grow in particular, if you could highlight on this?
We have grown as compared to last year and also in quarter on quarter. It's a profitable business for us. The ROC in this business has improved. We have acquired new customers. We've expanded our product portfolio for downlight and ceiling lights. We have done a lot of value engineering. We have backward integrated. We've got our own toolings. We've set up our own extrusion plant. We have diversified into the next product category of professionals: industrial lights, and also the floodlights, and now the streetlights have been rolled out, so that's the way. Now, as far as the industry situation is concerned, I still feel that on the consumer product side, the demand is under pressure.
But as far as the pricing is concerned, lately I'm finding that the pricing has stabilized. There was a huge pressure on pricing, and price erosion was happening, which lately I've seen there is some level of stability in pricing.
Okay. Did we experience a price decrease in this half in the first half, or has it been stable?
In last quarter, I've not seen a significant price erosion. They've all been stable.
Okay. And, one last question, like, if you could also highlight the wearables and hearables segment that we have, like, who are our major clients and the industry competitiveness in that particular segment?
Sorry, I'm not able to get you.
Sorry. Which segment are you talking about?
The wearables and hearables segment that we include in our EMS category.
The hearables and-
Wearables and hearables.
Yeah, so it's only one customer, which is Imagine Marketing, which has a brand, boAt, and we have a deal with them. So, we only have one customer. It's absolutely captive to them. And yeah, it's.
It's a decent margin, high ROCE.
We have decent ROCE. Very, very small balance sheet. Yeah, boAt as a brand is doing very well in the marketplace.
Okay, great. Thank you so much for answering the questions. All the very best.
Thank you so much. The next question is from the line of Niransh Jain from BNP Paribas. Please go ahead.
Yeah, hi, sir. Thank you for the opportunity, and congratulations on a good set of numbers. So, just some duplicate questions. Is it possible for you to share the revenue split of IT hardware as well for Q2, as well as volumes from for the semi-automatic and fully automatic machines?
So, the IT hardware in this quarter was minuscule.
Very small numbers, so that's why we didn't report it. It is, it is a very single-digit kind of a number. Semi-automatic washing machines, we sold around 5.5 million units, 5.5 lakh units, as against 5.2, say, in Q2 FY 2023-2024, and fully automatic was around 0.9 lakhs in Quarter Two.
So, we were 50%-
Fifty percent
... fully automatic.
Okay. Perfect. Sir, lastly, one question on the rising interest cost. So just wanted to better understand what is leading to this rise in the finance cost for this quarter. I mean, it has been rising in the first quarter as well. So, any thoughts on what exactly is leading to this?
Yeah. One, we have funded the acquisition through a combination of our internal accruals and debt. So that debt has led to higher finance costs, the iSmartu acquisition that has been done. And also, the CapEx intensity has been high, and yeah, and third is, of course, the more properties we keep taking on rental premises, so this includes also the Ind AS adjustment on the interest on lease obligation, because the entire rent gets split between the depreciation and the interest cost. Yeah, but mainly, it's so mainly on account of the acquisition and also if you look at the balance sheet between March and September, the debt levels have gone up. One, on account of acquisition and also on account of increased business.
Got it. Sir, what is the reason for the sharp jump in the tax expense as well, like related to the deferred tax that we have seen this quarter?
Deferred tax is, basically, entry which has been made on this one-time gain, because the way this whole investment will be treated is that it will be restated every quarter. This AIL takes an investment and our fair value gain on this, so it will be restated. The value of the gain will get, keep getting restated every quarter. So, the auditors have kind of created a deferred tax liability on that. And, yeah, so at some point of time, maybe in Q4 or Q1 of next financial year, this will further get listed. So yeah, so it will keep getting restated every quarter, and that's the reason the deferred tax liability has been created.
Sure, about it. Thank you so much, sir, and all the best.
Thank you.
Thank you so much. The next question is from the line of Omkar Ghugadare from Shree Investments. Please go ahead.
Yeah, this exceptional gain which you have received, how you plan to utilize that? Reinvesting in the business again, or...
No, no, so as of now, it's a notional gain only because-
Okay.
They have taken a stake in that company, but that stake is an unlisted company right now, which they have filed the DRHP, and they should get listed in the next six to eight months. And then we will take a call on our investment. We think they are growing as a company, profitable company. They will be investing more on designing, backward integration, and on. So yeah, this is a monetizable opportunity for us, so we'll take a call as and when the opportunity comes for monetizing it. So then it will become a cash inflow for us. But as of now, it's an accounting entry for right now.
Okay. Another thing is that, I guess for the next two years, most of the growth would be coming from, mobile business and the IT hardware business, right? And after that, we can see contribution coming from the high-margin business, which you just mentioned. Is that understanding, correct?
... Absolutely. So mobile will be the largest trigger for growth. In couple of years, IT hardware should follow mobiles. It should be the second largest, and then the focus on backward integration, which we are pursuing.
So, like
More opportunities can come in, but yeah, as of now, these are the strategic things, that's the growth drivers for us. Yeah.
Okay. Okay, in terms of qualitative analysis, how big is the opportunity in the high margin business you talked about? Is this as big as the IT hardware or, like, not that big? Or it can eventually become, that's what I'm asking.
Please appreciate that, we are talking about in-house production of around 3-3.5 million units. And if I talk $100 phone, and we are talking about doing in-house around $20-$25, right? So $25 into 3 million phones, we are talking about $75 million a month. That's the kind of opportunity we are talking about. Finally, that's what the, that's what the canvas is. So we're talking about almost $800-$900 million opportunity in this component business, which is a very large opportunity because it's highly marginic.
Okay. I mean, it's too early to ask this question, but still, I mean, on a blended basis, how much that double-digit margin can affect the overall profitability of Dixon?
It's too early.
It's very difficult to say, but please be assured the margins should go up on account of operating leverage benefits, on account of backward integration, but still, please understand and appreciate that a large part of our growth will come from mobiles and IT hardware, which is relatively a lower margin business. So, there will be a fine balance, but overall, yes, I think so margin should keep expanding. Very... By how much? It's very difficult to quantify.
Just to conclude, whatever margin expansion we'll be seeing, that would be seen after two years. That's what we can say, or it can gradually keep on moving upwards?
It should start reflecting, yeah, by businesses in the next 15-18 months. It should start reflecting.
Start expecting margins to move up gradually?
Yeah, it should start to move up in the next 15-18 months. Once the backward integration piece is stabilized and we have enough quantities in that, then it should start reflecting in the numbers.
And till that time, how much you are expecting? Around 3.6%-3.8%? 4% you are expecting?
That should be sub-4%, 3.6%, 3.8%, 3.9%, somewhere around that range. Probably.
Okay. All right. Thank you.
Thank you very much. We will take that as our last question. I would now like to hand the conference over to Ms. Bhoomika Nair for closing comments.
Much, sir, for giving us the opportunity to host the call and, you know, answering all the queries. Thank you very much and all the participants, and wish you all the very best, sir. Thank you.
Thank you, Bhoomika .
Thank you, everyone.
Thank you very much.
Thank you. Really appreciate it.
On behalf of DAM Capital Advisors Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.